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Monday, May 29, 2023

IDEALAB–Idealab Facing Tough Sell to Investors as It Files for IPO

Idealab is the dot-com industry’s biggest incubator, and after filing for an initial public offering last week, the company proved it’s certainly the boldest.

Technology businesses are calling off their IPOs left and right, as public Internet companies including some of Idealab’s own hatchlings have seen their stocks hammered to record lows. But that’s apparently of no concern to the Pasadena-based powerhouse, which develops and launches startup tech companies.

Numerous industry watchers said Idealab will have to convince investors already wary of overvalued tech companies that incubators in general and Idealab in particular have long-term staying power.

Company officials declined to comment last week, citing the “quiet period” imposed by the Securities and Exchange Commission.

“No one has yet created a public entity out of a company incubator,” said Jon Funk, general partner at venture capital firm Media Technology Ventures. “They have to create a story that proves that they have created a startup company development infrastructure that has long-term value for investors, and that some features about that infrastructure are unique and competitively better than everyone else’s.”

Idealab is hoping to raise $300 million through its public offering, according to a prospectus the company filed April 20. The filing came on the heels of a $1 billion equity investment Idealab received last month.

The prospectus did not include more detailed figures.

Idealab’s filing states that the company plans to use the funds raised to increase its ability to launch new companies, as well as to heighten investments in interactive communications. The money could also come in handy for its ongoing expansion, including a possible move to larger facilities at the Ambassador College site in Pasadena.

Idealab’s highly anticipated IPO might have been wildly appealing six months ago, as Internet-related companies rode a market wave. Now, Idealab will have some explaining to do, if it’s going to interest investors in pouring even more money into the company’s coffers.

Idealab executives will undoubtedly talk about building companies, not quick capital gains, industry observers said. As the best-known brand name among incubators, Idealab will also likely assert that it has a competitive advantage.

Of the 35 companies that have been launched by Idealab, only seven have gone public, and many of those have seen their stock prices plummet over the past six months. Idealab hatchling eToys Inc. is doing so poorly it closed at $6 last week after peaking at $84.25 last October that the Santa Monica-based toy e-tailer is named in nearly every news report about dot-coms’ fall from grace.

That has made some observers wonder why Idealab CEO Bill Gross, known as one of today’s sharpest and shrewdest businessmen, would look to take his incubator public at such a time. Industry insiders said the timing is peculiar, but sensed a longer-term strategy underlying the company’s decision.

“I think it’s a wise time for them to tap the markets and put more money to work internally,” said Todd Springer, managing director at venture capital firm Trident Capital Inc.

(Trident is a co-investor with Idealab in Utility.com.)

“In terms of filing in a weak market, I think it makes sense just to start it rather than try to guess whether the market’s going to be attractive two months from now,” Springer said.

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